One of the recent books I have read is “The Essays of Warren Buffett: Lessons for Investors and Managers” by Lawrence A. Cunningham. The book contains a compilation of Warren Buffett’s investment philosophies, which are gold nuggets for investors and managers alike. In this post, I will share my favorite quotes from the book and valuable lessons I have learnt.
Warren Buffett – The Oracle of Omaha
It is safe to assume that Warren Buffett is one of the most successful investors in the world. With net worth of USD82.5 billion as of March 9, 2019, he is the third wealthiest person behind Jeff Bezos and Bill Gates.
Although he may be loaded with huge amounts of wealth, he lives a quite a frugal life. It is said he still lives in the same house he bought since 1958 (that’s close to 60 years!) and he never spends more than USD3.17 (that’s about RM12!) every morning for breakfast.
Who here is guilty of spending more for breakfast than Warren Buffett, the third wealthiest man on earth?
Besides that, Warren Buffett is also one of the most charitable billionaires in the world with a total of more than USD30 billion donated to various charities! This goes to show that not only is he a success in his business, he is also a generous giver – amazing!
All that being said, what I like most about him is his sense of humor and wit, which can be seen throughout his annual letters and through his quotes. Even through some of his quotes (and quotes from other sources but found in this book), you will be able to learn a thing or two on Warren Buffett’s investing philosophies and what made him a success in his field.
In this post, I will share with you my favorite quotes found in this book and what I have learnt. Without further ado, let’s begin!
Key Lessons from “The Essays of Warren Buffett: Lessons for Investors and Managers”
1. Invest in What You Understand
As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.
It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience are definitely limited and there are seldom more than two to three enterprises at any given time in which I personally feel myself entitled to put full confidence – Warren Buffett.
I think it goes without saying that one of the key factors to have success in your investments is to know what you are investing in.
More often than not, we hear of people losing money to pyramid schemes and get-rich-quick-scams. The reason people fall for such things are because of greed and lack of understanding of how the “business” generates such lucrative returns. So, the very first lesson on investing is this – understand what you are investing in.
Warren Buffett goes on to clarify that we won’t be able to understand every investment that comes our way and that’s totally fine. You just need to understand deeply a few investments.
Personally for me, I thoroughly like investing in REITs because I understand it. I know the business model of a REIT, the way it generates its income, the factors that would affect a REIT’s performance, the laws and rules that governs the conduct of REITs and all other things about REITs.
With enough research done, it makes it much easier for me to find the needle (REIT) in the haystack to invest my money in. If you are considering to invest in stocks, I would highly recommend to check out REITs as they are relatively easy to understand. (Read: 5 Things to Consider before Investing in REITs).
Another tip would be to research on things you already have experience or interest in. Say if you are an IT guy and you’re keen to start investing towards financial freedom (because who doesn’t want that right?), perhaps you can start researching on listed IT companies. You will definitely understand the industry better than an accountant or doctor would. You may even consider looking into other industries such as healthcare or finance out of interest, and that’s totally fine.
Just don’t get caught up in wanting to know too many things that you end up not knowing one thing well enough to be worth your investment. I’m guilty of being a jack of all trades, master of none as well.
2. Don’t Over Diversify
Diversification is protection against ignorance. It makes little sense if you know what you are doing – Warren Buffett
This was something that caught my attention and totally contrary to popular view that the more you diversify the less risk there is. Warren Buffett’s investment principle is simple, if you have spotted the best investment there is and you know every detail of that investment, why would you still want to put your money into other “lousier” investments for the sake of diversification?
For instance, if I was about to buy a pen and I know that the Pilot pen is the best available option; would I spend my money on 3 Pilot pens (which I know are of great quality) or would I diversify and buy 1 Pilot, 1 Pentel and 1 Kiko (just in case, you know)? It would make more sense to buy 3 quality pens than to buy average ones.
That being said, I believe Warren Buffett isn’t an extremist on this principle either. If you look at Berkshire Hathaway’s stock holdings, they hold multiple stocks as well. Companies like Apple, Bank of America, Coca Cola, and many others.
Although Berkshire holds many, stocks they are the cream of the crop, the best of the best investments, which is worth Warren’s investments.
Behold the fool saith, “Put not all thine eggs in the one basket” – which is but a matter of saying, “Scatter your money and your attention”; but the wise man saith, “Put all your eggs in the one basket and – watch that basket.” – Mark Twain
Of course this principle should only be applied to those who have really understood every detail of their investments – which falls back to lesson #1 above.
If you are worried about being too overly concentrated in a few of your investments, here’s what Warren Buffett has to say:
To suggest that this investor should sell of portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team – Warren Buffett
So go ahead, invest only in the “Michael Jordans” of the game and not every Tom, Dick and Harry because Tom, Dick and Harry will bring the team down.
3. Falling Prices is a Good Thing
If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Many investors get this one wrong.
Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices – Warren Buffett
For me, this was one of the most mind-blowing moments in the book.
The big disclaimer is that this is only applicable if you’re a net buyer of the stock and are keeping it for the long run. Warren Buffett’s holding period for a stock is “forever” hence it would make much sense for him to be happy when price of stocks are at a bargain.
After understanding this, I actually hoped for the good stocks that I hold to drop in price so that I can average down my stock price. Also, because I hold my stocks for the long haul, the daily price fluctuations don’t bother me too much. This releases me from any worry or anxiety when investing in stocks.
However, if you’re a net seller of stocks, this is obviously not for you. I would suggest that you invest only your excess cash into stocks so that when emergency happens, you don’t need to force sell your stocks at a low price.
4. Enjoy Life and Take It Easy
When Warren Buffett was asked about his health and the years he has left in Berkshire, here’s what he says:
Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.
While some shareholders are concern on the effect of his death on Berkshire stock, he comforts them by saying:
It won’t be as negative for the holders as it will be for me.
With a pinch of humor inserted, I absolutely love how he phrases things. It is indeed true that if you do what you love, you’ll not need to work for another day.
I don’t know if I’m alone in this but I have yet to find what I love to do. I am the typical jack of all trades, master of none. If that’s you too, here is some encouragement; keep trying and discovering your passion. You are definitely not alone! There is a purpose and plan for your life; go live it to the fullest!
Also, we’ve got to learn to laugh a little more and smile a little more. Life isn’t all about our jobs. There’s more to life than the 9 to 5 routine and dreading for the weekend every Monday. Take it easy and perhaps, it may promote longevity of life.
Summary
There are many other quotes from the book but these are the few which really stood out for me. One of the best investments you can make today is to invest in yourself. If you get the opportunity, do pick up this book and have a read for yourself; I’d recommend it.
If reading isn’t your thing, there are plenty of other resources online (i.e. videos, e-courses) to enhance your knowledge and skill set. You’re the best investment possible, don’t miss that!
If I left out any memorable quotes from Warren Buffett, feel free to leave them in the comment section below. I would love to hear from you, cheers!
